Although incorporating may not be the bureaucratic marathon many people perceive it to be, there are still some profound differences you may notice once you have formed your own limited company.
This is because you are no longer a sole trader – you are now an employee of your own limited company.
Advantages of a limited company
Being your own boss
You may have thought you were your own boss while you were a sole trader, but if you form a limited company you are literally your own boss. You are an employee of your limited company, and who runs that company? You do.
Limited liability simply means you only stand to lose what you have invested in the company. So if you invest £1,000 and your laptop, should things go wrong and your limited company goes under, you will only be liable for the £1,000 and a laptop – your creditors can’t touch your personal property.
Credit rating in the toilet? Not to worry – as limited companies are their own legal entity you can begin anew and borrow money willy-nilly (Disclaimer: Do not borrow money willy-nilly). This is a great way to get some startup capital in the bank.
As a limited company is completely separate from you as a person – unlike being a sole trader where you are the business – you can split it up between a number of owners, accept investment by selling shares, or even sell the entire business to someone else should you wish.
As a sole trader you will be taxed on your total income, from which income tax and national insurance contributions will be deducted. Your limited company, by comparison, will only be subject to corporation tax, and by paying yourself through a cunning combination of salary and dividends you can keep more of your hard-earned cash.
Disadvantages of a limited company
Although not a problem for most, if you are a secret-squirrel type who doesn’t like to make your affairs public, a limited company may not be for you. The directors of your limited company, as well as the share distribution and other paperwork, will be available upon request from Companies House to anyone who wishes to pay the filing fee.
IR35 is a pesky piece of legislation designed to catch those who are in fact employees of a larger company and are forming a limited company in order to take home more of their earnings. If you are a genuinely independent business then you’ll have nothing to worry about, however it couldn’t hurt to read up a little, right?
Keeping it simple
One inescapable certainty of running a limited company is more administration (unless you outsource it – hint hint). Although the full list of Director’s Fiduciary Responsibilities overlaps somewhat with the paperwork a sole trader must complete, there are some extra duties than can be off-putting for first timers.